Thursday, November 4, 2010

Day Before the N.F. Payrolls Report - Review

After an initial dip on the FOMC announcement yesterday, ES futures closed higher and, overnight, rallied through strong resistance and the Key Institutional Level, thus invalidating the Reversal Date. 
The markets responded to the Fed’s more than tripling of Treasury purchases, which will now funnel about $25 billion per week through the primary dealers and into the markets (after having been levered) beginning late next week, and continuing at least through June 2011.  This is enough to be inflationary throughout the economy and, while we were on alert for a sell-the-news reaction over the last week, it clearly did not materialize. 

Not surprisingly, the US Dollar is down, and Treasury futures were up, though 30 Year T-Bonds are noticeably lagging.  This is purely because of the preference of Fed purchases, which will concentrate in the 2-10 year tenors.  Inflation concerns will keep the 30 year yields (and mortgage rates) relatively higher, and will eventually impact the 10 Year similarly.  While 10 Year T-Notes should rally initially, a dip in the yield (inverse to price) below 2.0% (and corresponding overshoot of the December 2008 lows) would be a long term short signal in the futures. 

Going forward, the most serious impediment to the risk markets will be regarding the currency in which they are denominated.  For instance, US equities will sell off when other central banks announce programs to counter US Dollar debasement, or if the Fed starts attempting to sterilize its purchases.  There will be some violent shakeouts, but until this happens, we will be in a buy the dips environment.  Enjoy the ride while it lasts. The Claims Report was ignored as expected, thus giving more clear evidence that Wall Street never cares about the poor unemployed in Main Street.


  1. Thinking a long the 10 yr short the 30 yr be a good arbitrage play?

  2. The proxy for US Treasuries, TLT bounced around the early part of the week as it has been doing. As soon as the QE2 announcement came out though it started a free fall from which it did not recover. It is in a clear downtrend now with support at 97 on the daily chart and resistance near the bearish 20 day/100day Simple Moving Average (SMA) cross at 100.60-101.10. The MACD and RSI on the daily chart support a further move lower. The weekly chart shows the string of red candles right on top of support at 97.69. Looking left there is next support at 95 to 95.50 and then the SMA cross near 94.25 and the 92 area. Do not own bonds.